Examination of Witnesses (Questions 440-459)
14 SEPTEMBER 2004
MR RICHARD
LAMBERT, PROFESSOR
PATRICK DOWLING
AND MR
PETER REID
Q440 Mr Plaskitt: Mr Lambert, earlier
in the session you said that too much emphasis is placed on spin-out.
Why do you think that has been the case?
Mr Lambert: Partly because policymakers
have found it a useful way of measuring progress, and if you set
somebody a target for producing a spin-out they will meet the
target because it is not a terrifically challenging thing to do.
I think essentially that is it. There is some work which has come
out of Nottingham University Business School, which I thought
was quite useful in that respect, which suggested what the elements
of success in spin-outs were, and I thought that summarised some
of the points.
Q441 Mr Plaskitt: We have just received
that. Although you say there is too much emphasis on it and we
should be cautious about using it as a measure, nevertheless it
is a measure we should place some attention to.
Mr Lambert: Yes, but there need
to be other measures alongside it.
Q442 Mr Plaskitt: Sure, and we are discussing
the other measures this morning, but just for a moment I want
to focus on the spin-out thing. The figure which is interesting
is the extent to which there are hugely different stories here
in different areas. I was struck by the finding in your study
that Oxford University, at one end of the spectrum, attracted
private capital to 95% of its spin-outs, but on the other hand
a third of universities with spin-outs did not attract any external
equity at all. Why this huge variation across this network?
Mr Lambert: Possibly two answers
but my colleagues, I am sure, would have others. One is that Oxford-Isis
is a model of its kind in terms of technology transfer offices.
It is regarded as a very high quality outfit, and they would dissuade
spin-outs which did not seem likely to have the ability to attract
external capital, unless there was a good reason not to. You would
find in the US, for instance, the ratios would be roughly the
same in places like MIT or the University of Wisconsin, which
are big research-based universities with large industrial connections
and not a lot of spin-outs. The second part of the answer would
be that the seed funding was provided through HEFCE which supported
and encouraged spin-outs, and some of them have been enormous
successes of course and have turned into public companies and
generated jobs and wealth on a large scale, but a lot of them
have not.
Q443 Mr Plaskitt: There are two sides
to this, there are the universities and research centres which
come up with the idea that might fly on the one hand, on the other
hand there are the venture capitalists sniffing around to see
where there is a good idea which they can back.
Mr Lambert: Yes.
Q444 Mr Plaskitt: Which, in your view,
is driving the process? Is it more the money looking for the known
names and known areas and constantly sniffing around looking for
something which then leads to having lots of spin-outs, or is
it simply the fact that they are the best ones and the best ideas
and the ones most likely to work?
Mr Lambert: My impression is that
the venture capital community has not played a huge part in the
development of technology transfer in the UK, in the way it has
in the US, say, and there are a number of reasons for that which
you will be able to articulate better than I could. It has often
been supply-driven, where universities have said, "We have
this idea", and in a sense the quickest and easiest way to
exploit that idea is to set up a spin-out and go, which is easier
than to negotiate a licensing agreement with a third party. So
there has been a tendency just to take that option.
Professor Dowling: But also there
was a naivety amongst the academic community which was strapped
for cash, that this was a quick way to make some extra cash. I
remember going to a university, which shall be nameless, and they
said, "We have all these spin-outs" and I asked, "Where
are they?" and they said, "In that office there, that
office there, that office there", they were just names on
doors. Those are not spin-outs and they were bound to fail, and
of course they hit the dust. We have come a long way, even in
the last 10 years, in understanding what is necessary to have
a successful spin-out.
Mr Lambert: There are some interesting
examples which perhaps you would want to take a look at of firms,
as it were, buying forward the knowledge created by university
departments. Oxford's chemistry department has built a new laboratory
on the strength of a deal with a private organisation, IP2IPO,
and they have struck a deal which says, "Over the next few
years, we will have a first look at your intellectual property
and in return we will give you cash up front", which has
allowed them to build the new facility. So there is some innovative
finance coming into the area.
Mr Reid: Then that finance is
applying very commercial decisions on how the idea should be exploited
going forward. A much sadder example of a spin-out is BioTech-Region
in Munich where 1 billion euros were put into getting spin-outs
from the biotech community—biotech clusters—from the
Munich region and it has been a disastrous failure. It was an
exaggeration of some of the problems in the UK, that university
labs just called themselves companies and took money from venture
capital funding but had no commercial skill and, great surprise,
they failed. It was much more extreme than the problems there
were in Britain.
Q445 Mr Plaskitt: I was going to end
by asking you about international comparisons, so you have anticipated
my question. That is an example of a failure but looking around
the rest of the world, where would you point us if you said, "There's
a good example of how a country has sorted out its relationship
between its academic research and the business world in terms
of successfully launching enterprises"? Are there some shining
examples, in your view?
Mr Reid: I would hate to point
back to Stanford and MIT but they can both claim huge spin-out
activity and it is more a cultural feature of these universities
than a policy feature. They just make it very easy for the business
community, whether large companies or business angels or VCs,
to meet and have visibility over the innovations which are happening.
So it is much easier for opportunities to be identified and then
for management teams to be brought in.
Q446 Norman Lamb: No incentives, just
the culture of the business community and the university community
working together?
Professor Dowling: I can cite
the position in Finland. I have just recently reviewed the Academy
of Finland. They are one of the most entrepreneurial nations in
Europe and there, to my surprise, their secret was that the Academy
concentrates on fundamental research, it does not give money to
industry connections at all, it is only fundamental research.
So they start by making sure the academics are doing fundamental
research, and a different body entirely deals with the industry-university
relationships and they are comprised mainly of business people
who occupy that, and they fund it separately but they separate
out the funding from the fundamental research, and say, "That
is the seed corn", so most of the money goes into stimulating
fundamental research, bottom-up and, after our report, with little
top-down control as well. That was a surprising model. I expected
to see very close links between industry and research all the
way up. Universities there are not as advanced in many ways as
we are in relating to industry, or not as sophisticated, but they
know what their job is, and it is doing teaching and research.
Mr Plaskitt: Thank you.
Q447 Chairman: Mr Lambert, your report
mentioned a figure of £150 million a year for the funding
of knowledge transfer. Do you think the Government's commitment
of £110 million a year by 2007-08 will be sufficient for
knowledge transfer from universities to achieve this full potential?
If not, how can the existing amounts of money be gathered or better-spent?
Mr Lambert: The £150 million
was a figure proposed by the CBI, and by Sir Gareth Roberts, separately,
and that seemed an interesting combination. There is evidence
that the economic returns on this money are significant, that
there are economic and social returns from third stream funding.
So I made the case for increasing that sum. My feelings are that
within the context of the overall science and innovation spending
review it is much more important that the total cake is being
increased. I proposed that that particular slice of it might be
expanded and I did think that was a good idea. The really important
news, and the strongly positive news, is the increase in the overall
science budget which dwarfs a few million quid here or there on
third stream funding.
Q448 Chairman: There has been a plethora
of schemes established to improve access to finance at regional
and national levels, and what we are hearing this morning from
you is that insufficient access to funds is still a significant
barrier. Could you tell us how you could overcome that in some
way? You mentioned venture capital being involved here. How does
it work in the United States?
Mr Reid: Finance for spin-out
companies or general relationships between business and universities?
Q449 Chairman: General relationships,
not just for spin-outs. At what stage of the development cycle
is there a need for further improvement in the access to finance
and does this problem vary between regions?
Professor Dowling: The proof-of-concept
stage is an area which is often neglected. We have money from
the Challenge Fund and so on to get things past a board where
they say, "Right, this is a workable idea", but you
then need money to develop and to convince people. We have a good
example where we have produced an x-ray machine which can look
at three dimensions in security, going through airports and so
on. The concept was easy to demonstrate in a laboratory but the
amount of money we needed to take it from there to prove the concept
was enormous, and we could only do it by getting an American investor
to invest in it. It is not easy for us to lay hands on money for
proof of concept.
Mr Lambert: I think proof of concept
is the central thing for public funding, because that is not what
business will do. There are some cases, in Scotland for instance,
where Scottish Enterprise has set up a proof of concept funding
arrangement, and some of the RDAs are thinking about it, and I
think that would be a good idea to explore.
Mr Reid: I would agree completely.
There are really two issues. One is, how do you get new-to-world
innovations out of universities, and that is proof of concept;
you have something which is really new, you need to make sure
it works, in what way and for which market, but it is not yet
commercial. We started earlier in this discussion talking about
demand from business and the existing industry base, and they
do not need these new tool innovations, which may just end up
as new entities, new companies, being formed or you end up with
very large businesses buying the technology. So I think there
is need to help the general industrial base understand how and
why they should engage with universities, and again I think there
will be a big leverage of money put in it to support the building
of demand for innovation from industry. There is now a large push
of innovation from universities, and spin-outs is one example
of that, and I think there needs to be focus on stimulating demand
from the industry base.
Q450 Chairman: To quote Nottingham University
in terms of the issue of spin-outs, Professor Mike Wright in his
submission to us quoted availability of finance, and that the
lack of seed funding from universities was viewed as the greatest
impediment to the creation of spin-out companies. How can we overcome
that?
Mr Reid: If that does not inhibit
significant spin-outs in America, you have to say why is it different
in England.
Q451 Chairman: And Scotland.
Mr Reid: It is not just lack of
money, it may be there is something wrong with the spin-out proposition
which means the money is not available. It may be that you need
proof of concept funding to get the technology more robust and
more frugal before venture capital can come in. Or it may be that
you need help to build up the management capacity of that organisation
before market money will move in.
Professor Dowling: But it is seed-funding
that the HEIF bid provided to many universities, so I think it
is not too difficult to do that. Indeed, in my own case, I took
some of our surplus and said, "This is seed funding"
and put in £1 million and said, "This is how we will
start", and that was about 10 years ago. So in some cases
it is self-help. Proof of concept is a much more difficult one,
there is a lot of money involved and universities do not have
access to it in general.
Q452 Mr Cousins: As I have understood
the discussion this morning, I understand all three of you to
be saying that at present the Higher Education Funding Council
and the research councils take no account of regional factors
explicitly, and that basically all three of you are endorsing
that approach?
Mr Lambert: I think it is right,
personally, that research councils and RAE funding should be judged
on excellence wherever it is to be found. As I said, I think that
does create a tension. There is a tension created at a regional
level then because there are some university departments which
do a first class job but which are not four or five star on the
RAE scale and their future is in jeopardy, and those departments
need, where they can show they have a strong part to play in the
regional economy, a separate line of thought being addressed for
them. But excellence for the bulk of the funding, personally,
I think is critical.
Q453 Mr Cousins: Yes, indeed, that is
at the heart of your proposal, and we are just coming on to that,
but I did want to be clear that the Higher Education Funding Council
resources and the research council resources are the principal
mechanisms of delivering research funding and they are the ones
which are going to be greatly increased in the next spending round.
There are no regional factors in them and you are not advocating
any regional factors in them? Is that a fair summary?
Mr Reid: Is that the case for
education as well or just research? For research there is a focus
on excellence, I am not sure if there is a regional focus in funding
degree programmes or foundation degree programmes.
Professor Dowling: The third leg
funding, which—
Q454 Mr Cousins: We are just about to
come on to that, I am not talking about that, I am talking about
the funding from research councils and the Higher Education—
Professor Dowling: They would
take no account of the fact.
Q455 Mr Cousins: You have drawn attention
to, and you have mentioned, Mr Lambert, verbally this morning,
some examples at regional level of initiatives you thought were
worthwhile, do you think anything has come out of those regional
RDA-funded programmes of investment in research, the ones which
exist already which you have referred to? Do you think anything
has come out of them that the Higher Education Funding Council
or the research councils ought to take account of? Is there any
mechanism for doing that?
Mr Lambert: A starting point is
that there are first class research departments in all the regions
and nations.
Q456 Mr Cousins: Countries, is the term.
Mr Lambert: Forgive me.
Q457 Mr Cousins: I often get that wrong
myself. Regions and countries.
Mr Lambert: The RDAs, thus far,
the ones I am aware of, have been dealing with research-intensive,
high quality research organisations, the ones I have taken a look
at, and have been trying to spread them into the regional business
area. As I say, and I am sorry I keep repeating the point, where
there is a question is that Oxford Brookes has a bio-science department
which is not five star but has a lot of relationship with the
brewing industry—Greenwich is one and there is another at
Cranfield and another—and it does important business work
but does not get top research ratings, and we need to think about
how they are going to be sustained over the long-term.
Q458 Mr Cousins: Indeed, but the point
I am putting to you is that you have made it clear the existing
research funding streams within the public sector do not take
account of regional factors, and indeed you are not advocating
that they should, but alongside that now we have regionally-based
spending on research through the regional developments agencies.
Mr Lambert: Yes. It is only just
picking up, I think. They have not yet been tasked with making
it a priority which I hope they are going to.
Q459 Mr Cousins: Do you think there may
be a case, if not now then in the future, for some kind of formal
mechanism whereby the Higher Education Funding Council and research
councils should take account of what has come out of these regionally-based
programmes of spending on research?
Mr Lambert: I think, personally,
there would be a great risk in trying to allocate the bulk of
researching funding on any other basis than excellence.
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